Green Deal

Install energy efficiency emasures at no upfront cost Reduce your energy bills by replacing windows or installing insulation or solar panels – or even do all 3! You can get a loan that is repaid through your energy savings – there is no cost or cashe outlay by you!

The Green Deal is to be introduced in October-2012 and is a scheme to offer all building occupiers the chance to improve energy efficiency at no upfront cost. The householder/business will be able to install energy saving measures with the costs being paid for through lower energy bills. Every building will be able to borrow an amount of money to spend on the energy efficiency measures. This loan will come from Green Deal Providers and will be fixed against the property rather than the property owner. This means that if the property owner moves house the loan will remain with the house, and the new owner will benefit through reduced energy bill savings.

In order to meet the UK’s (legally binding) carbon reduction targets there is a need to update the old and energy inefficient housing stock. For example:

• 6 million UK homes have unfilled cavity walls
• 6 million UK households have not had their lofts insulated
• 7 million solid wall properties are un-insulated
• 6 million households do not have double glazing
• 70% of UK homes do not have heating controls
• 12 million homes have non-condensing boilers

The Green Deal is a scheme being implemented from October 2012 by the UK Government. It allows participants to make energy efficiency measures to their property (eligible measures detailed below) at no upfront cost to the property owner. The cost of installing these measures will be met in the form of a loan attached to the property (rather than to the property owner) with the repayments made through the resulting savings in their energy bills. With the loan being attached to the property rather than the property owner this means that the loan will stay with the property for the duration of the loan – irrespective of whether the same owner remains in control of the property.

Alongside the Green Deal will be the launch of the Energy Company Obligation (ECO). This sets a legal obligation on Energy Company’s to help those on lower incomes heat their homes through the Affordable Warmth target. This sets aside at least £540m of funding per year, for 10 years, to make energy saving improvements in the worst homes and a further £350m a year to deliver heating and insulation measures to the vulnerable. Social Housing tenants will also be able to access funding of around £190m per year for loft and cavity wall insulation measures. This scheme replaces the Community Energy Saving Programme (CESP).

Energy Companies, under ECO, will also have a legal obligation to help install measures in “hard to treat” properties, in a scheme known as the Carbon Saving Target (which replaces the Carbon Emissions Reduction Target which ends in Dec 2012). Hard to treat properties include those with solid walls and very old buildings that do not suit external insulation measures, and will include glazing and draught proofing, and it is estimated some 7 million homes could benefit under this scheme.

The total annual funding of the ECO scheme will be some £1.3bn per annum with the scheme being written into law for a minimum of 10 years.

Eligible Measures:

A full-list of eligible measures that can be undertaken through the Green Deal:

The loans available are attached to the electricity bill of the property, with the loan amount being repaid through energy (and thus financial) savings made through the energy efficiency improvements. The duration will vary depending on the cost of the measure being undertaken and the expected savings, however the loan can be up to 25 years in duration.

At the heart of the Green Deal is the “Golden Rule” which determines how much finance can be borrowed. The Golden Rule states that the amount borrowed to install the energy efficiency measure must be less than the expected savings made over the lifetime of the measure. It limits the amount that can be borrowed to the amount that is expected to be saved. It does not mean you cannot borrow or install an energy efficiency measure that does not meet the Golden Rule, it just means you can only borrow the amount that is expected to be saved. If the measure costs more than is expected to be saved then the consumer can choose to part-pay the difference.

Below we run through a very simplified example of how the Green Deal and the Golden Rule works. Please note that not all of the details have been finalised or released by DECC and thus these calculations are subject to change.

Example 1:

A consumer currently has the following electricity bill of £150 per quarter:

The consumer then wants to install a Solar PV system at a cost of £5,000 and through energy production and the Feed in tariff system this system will save the consumer £500 per annum, or equivalent to £125 per quarter:

The consumer wants to finance the Solar PV installation through a Green Deal loan, but first must make sure that the Golden Rule is satisfied. The loan is to be made for the full installation cost at and APR of 7% and can be up to a duration of 25 years:

Here we can see that the total savings and loan repayments over the lifetime of the loan will be:

Thus the Golden Rule is easily met where the loan is for 25 years.

However, let us say that the loan is only for 10 years and still has an interest rate of 7% APR thus:

Here we can see that the loan repayment and savings over the lifetime of the loan will be:

And thus the Golden Rule HAS NOT BEEN MET. In this instance there are 2 options:

1. Extend the loan to be at least 18 years:

1. The consumer borrows, as planned for 10years, but can only borrow a reduced amount and finance the rest themselves:

As loans can be taken out for a total of 25 years, in this instance a consumer is likely to want to take a 25 year loan based on the Solar PV life expectancy being 25 years. However, the lender is going to rather that they lend for the minimum time required (i.e. 18 years) and then the consumer would get the benefits of the installation from year 18 to year 25.

The actual length of the loan (and the details for this have not been finalised by DECC) is likely to be somewhere in between, and for the purpose of this example let’s assume the loan duration is agreed to be for 21 years:

In this instance the original electricity bill of £150 would now be reduced to £139 per annum:

And added to this the homeowner would receive the full benefits of the Solar PV system from year 21 through to year 25 and have paid nothing for the Solar PV to be installed on their property.

The Green Deal Participants:

• Consumer: This is the end consumer who is interested in taking out the loan under the Green Deal to make the energy efficiency improvements to their property.
• Green Deal Providers: these are qualified and regulated entities that will market and implement the Green Deal for the consumer. Green Deal providers will market the scheme and explain the benefits to consumers. Once a consumer shows an interest in the Green Deal the first stage of the process will begin with a Green Deal Assessment (arranged for by the Green Deal provider).
• Green Deal Assessors: these are energy performance assessors that will be trained to assess properties to take part in the Green Deal. The assessment process will be based on the current EPC system whereby a property will be assessed for its current energy efficient levels and suggested energy efficiency improvements will be made. The assessor must be completely impartial in the process and cannot recommend any one measure, but must recommend all possible measures that can be undertaken.
• Green Deal Installers: these are qualified installers for the areas within they work. Whilst the overall project will be overseen by the Green Deal Provider, with all works project managed by them, the actual work must be undertaken by a suitably qualified installer under the Green Deal approval system.

The Green Deal Process:

The above diagram represents a simplified version of the entire process from Start to Finish. For a more detailed process map please see:

www.decc.gov.uk/en/content/cms/tackling/green_deal/gd_customer/gd_customer.aspx

The process begins with the Green Deal Providers who market the scheme to the public. Here they will explain the process, benefits and potential opportunities.

• Once a consumer decides they would like to investigate implementing the Green Deal they can approach a Green Deal Provider and ask for details. If the Consumer wishes they can then ask for the Green Deal Provider to arrange for a property energy survey to be undertaken.
• The energy survey is conducted by the Green Deal Assessor in a similar fashion to today’s EPC surveys. Following this the Green Deal Assessor will produce a current EPC, showing the current energy efficiency of the property. There will also be a list of suitable energy efficiency measures that can be undertaken to improve the energy efficiency of the property; their expected costs; and their associated expected savings.
• Once an assessment, and accompanying report, has been made the consumer can then take the assessment to any Green Deal provider to work out a Green Deal plan. The assessment will list all suitable energy efficiency measures, and the consumer must then agree which measures they want to be undertaken and which can be financed under the green Deal (i.e. those that meet the Golden Rule). Those measures that the consumer wants implemented but do not meet the Golden Rule can be part-financed by the consumer themselves. The measures that have been selected to be undertaken and agreed for between the consumer and Green Deal Provider make up the Green Deal Plan.
• Once the Green Deal Plan is agreed, the Green Deal provider will provide a quotation for the works to be undertaken. The Consumer can get several quotations from different Green Deal Providers (selecting whomever they feel is best), and if the value of the works to be undertaken is £10,000 or more then they will be obliged to receive at least 3 quotations.
• The Green Deal Provider that the consumer chooses will then take the Green Deal Plan, and the agreed quotation associated with this Plan, and arranges financing under the Green Deal scheme.
• Once financing is arranged the Green Deal Provider project manages all the installation work to be undertaken as part of the Green Deal Plan and ensures the Plan is implemented fully. The Consumer must then sign off on the works at the end of the installation.
• Finally, once the Consumer has signed off on all the works undertaken, the Green Deal Provider arranges with your electricity company for the loan repayments to be taken from your energy bill. Your electricity company will then pay the loan repayments back to whoever provided the finance under the Green Deal. The consumer will not see any increase in electricity bills as a result of the measures undertaken.

Calculating the Golden Rule:

As part of the Green Deal Assessment on the property a list of possible energy efficiency measures will be created specific to that property. This list will be made up of some or all of the measures eligible in the list above. Each of the eligible energy efficiency measures are modelled in RdSAP, a Standard Government Assessment Model. RdSAP will monitor the average cost of each measure and the expected savings and it will be this data that is used to see if a specific measure meets the Golden Rule.

DECC, on behalf of the Government, is currently exploring the idea of applying a “in-use” factor whereby the savings estimates from RdSAP would be revised down by a certain percentage based on real life evidence. The reason for this is to ensure that savings estimates are not overly optimistic which would result in excess charges being applied to electricity bills.

RdSAP is already quite a controversial system. Those in the Solar PV market know about SAP being based on a single house in Sheffield and the fact that the system treats the UK as a one degree country – meaning that Glasgow is assumed to have the same climate as Devon. The Government recognises this and is planning to alter RdSAP to account for this. However, it is likely that SAP will remain a very conservative estimate of potential savings.

That said, a new feature of the RdSAP process is called the Product Differentiation Process. This is whereby a manufacturer of a specific product can voluntarily prove the energy efficiency levels of their product and apply to have this entered into the RdSAP database. For example, all Solar PV panels are currently treated as having the exact same efficiency levels under SAP. Under the new system, PV manufacturers can apply to state (and must prove) that their panels are more efficient than others. This means that manufacturers that claim panels are 25% more efficient than others, and charge as such, can apply to have this taken into account, meaning their product will appear better under the Golden Rule. This is a significant development and could help drive innovation in many markets as manufacturers try to increase efficiencies as much as they currently do to decrease prices.

The following table shows estimated costs versus payback periods for the range of technologies included in the Green Deal. It also shows whether or not they meet the current Golden Rule requirements under these assumptions and whether any of the installations need to be part self-financed. Please note that the estimates of cost and Annual Savings are Cernunnos estimates and NOT the assumptions of RdSAP (which are yet to be released):

One thing to remember is that the energy savings of one system, that exceed the requirements of the Golden Rule, can be used towards meeting the Golden Rule of another system as long as both measures are installed at the same time under the same Green Deal Plan. This is explored further below.

The Green Deal Assessor, Assessment and Advice Report:

The Green Deal Assessor must be impartial and provide as much impartial advice to the consumer as possible. The site survey will be very similar to the current EPC survey and takes around an hour to conduct. They will then create a current EPC rating (and report) for the property.

In addition to this an occupancy assessment will be conducted to determine how the household’s energy use compares to the assumptions in RdSAP, and therefore to the level of savings they are likely to achieve. It will be the assessor’s responsibility to ensure that the energy and financial savings calculations that the Green Deal Report uses as the basis of its Golden Rule are correct and not overstated. Thus the table above that shows expected installation costs and expected annual savings will be individual to every household.

The Assessor will also be responsible for giving out information to occupants about the ECO funding and if an assessor notices a property is being under heated due to fuel poverty they can apply for ECO funding as part of the Green Deal process. Similarly if a home requires external wall insulation ECO funding can be applied for and obtained to help meet the Golden Rule.

Finally, a Green Deal Advice Report with all of the above will be supplied to the consumer and Green Deal Provider, with some behavioural advice.

For more information on EPC’s please click here.

The Green Deal Plan:

The Green Deal Plan is created from the list of eligible measures. Any number of measures can be installed in isolation or combination, although a combination of measures installed simultaneously is encouraged to achieve economies of scale.

When creating a Green Deal Plan the consumer/Green Deal Provider can use savings from measures which are particularly cost-effective to finance other measures which may not be as cost effective and would have otherwise required top-up finance. For example, from the table above we see that Solar PV has excess savings of £70.95 per annum, equating to 25 year savings of £1,773.69.

This £1,773.69 could then be used as the self-financing part to allow a Waste Water Heat Recovery system to be installed, which required self-financing of £1,350:

Taking a whole-house approach is intended to create Economies of Scale for the installation process and ensure that energy efficiency is delivered on a cost-effective basis. They also want simple measures to be undertaken before/alongside more complicated measures such as micro-generation. Many of the measures such as insulation and light fittings are simple and will always be undertaken as they are so cost effective when borrowing for a 25 year period.

This method of creating Economies of Scale is also likely to bring loan durations down as the payback period of different system efficiency measures are averaged out.

The Green Deal Plan will include the product and installation costs of the measures being installed which will form the official quotation, and each, with the expected annual savings, will be unique to every consumer. The quotation will be based not only on the cost of having all the works completed, but also the finance offer from a Green Deal finance company. These companies are specifically offering Green Deal loans and interest rates are to be kept to a minimum (it has been discussed that a loan of around 7% APR will be available). The consumer can and should get up to 3 quotations for any Green Deal Plan from 3 different Green Deal Providers. Alternatively, the consumer can go directly to a Green Deal Installer for a quotation for the works to be completed.

Finally, when a quotation is accepted by the consumer, following a cooling off period of 14 days works can be carried out.

The Green Deal Provider:

It is obvious that the Green Deal provider is an essential component of the scheme. From marketing the scheme to arranging surveys, designing the Plan, arranging financing, ensuring installations are completed and then finally finalising all the paperwork, a Green Deal provider is the “Start to Finish” link.

In addition to all of the above, the Green Deal provider is counter-signatory to the Green Deal Plan, which is the credit agreement between the consumer and the Green Deal Provider setting out the terms and obligations of both sides of the deal. They will also be the ongoing customer services company to deal with queries, servicing and complaints. Thus it is essential that you select the right Green Deal Provider – someone you know who is up to the job and trust.

Who can take part?

The Green Deal will be launched for all homeowners in October 2012. For businesses it has been delayed until “spring 2013”. All homeowners will be eligible to take part in either the Green Deal or ECO.

Because the Green Deal loan is not a personal loan it is not means tested and thus no personal credit check will be performed (there will be a credit check on the property itself though to make sure a Green Deal loan hasn’t been taken previously!).

Why take part?

Landlords (domestic and commercial) will have to update their properties to an ‘E’ rating by 2018 and cannot deny reasonable requests from tenants for energy efficiency upgrades from April 2016. Landlords are a prime candidate for this scheme as they can associate the loan with the property and have the tenants repay the loan through the energy bills of an occupied property.

In addition commercial properties that are more energy efficient will be more desirable to potential tenants and could well command increased rental premiums. This is likely to drive this potential sector to take up the Green Deal.

Elsewhere, the Government has announced that properties undertaking extensions and/or retro-fits will be obliged to partake in the Green Deal, which makes sense as they can then pay for energy efficiency measures on extensions at no up-front cost to the builder/consumer.

Meanwhile social landlords and local authorities will be encouraged to take part in the scheme with many already planning for the scheme launch now.

Finally, why not take advantage? If you were considering upgrading your boiler or installing new windows you can now do this at no up-front costs, whilst similarly increasing the value of your property.

Why be one of the first?

The UK Government is set to allocate £200m of funding as a special time limited introductory offer to boost he early uptake of the scheme. The Green Deal is the last and only large scale environmental policy of the coalition Government and they will do everything they can to make sure it succeeds.

The Green Deal and the RHI/FiT?

The RHI has been delayed for households until 2013 whilst the Green Deal has been delayed for Businesses until 2013! The Government recognises that there are advantages of running the schemes side by side but has not actually worked out how to do this as of yet. They want to encourage the uptake of energy efficiency before energy generation is installed and it has yet to be decided on how best to do this.

Solar PV is included in the list of eligible technologies for the Green Deal, and using funding from the Green Deal to pay for Solar PV systems on your house is allowed. You will also then be eligible for the Feed in Tariff scheme.